´´ Value Investing: The Wisdom of the Samurai (2)

Tuesday, December 6, 2016

Value Investing: The Wisdom of the Samurai (2)

Make no mistake dear reader. Stock market investing is a form of war. The enemy is the market, especially financial institutions and institutional investors. They have to be fought ruthlessly over a long period of time. But in order to take advantage of financial institutions, and crush the market over the long- haul, you need not only to have a sound process but also a strategy.

The most known classics on war strategies are Sun Tzu’s “The Art of War” and Clausewitz's “On War”. Lesser known is Samurai Miyamoto Musashi (1584-1645).

Musashi Miyamoto was a lonely Samurai who dedicated much of his life to mastering Zen Buddhism and swordsmanship. He came to fame by introducing a very unique Kenjutsu fighting technique. It used both the long sword (katana) and the short sword (wakizashi) simultaneously (="Niten Ichi Ryu").

Source: Wikicommons

One tremendous advantage of Musashi's technique was that it was efficient and powerful. It involved no flashy, impulsive or unwanted movements. And it offered perfect distancing and timing. Consequently, the attacks would be neat and tight.

Musashi Miyamoto wrote a book about mastering the swordsmanship. The book of Five Rings. It is a book about strategy, tactics and the philosophy of sword- fencing, which stresses the importance of knowing oneself and focusing one’s attacks on the enemy’s weak-spots in order to succeed in any fight.

One has to wonder whether Musashi's ability to balance hard fighting skills and artistic and philosophical intellect enabled him to be a dominant force in Japan's clan wars during his time. If that is the case it should give a lot of valuable inside regarding the art aspect of value investing. Those art aspects are certain mental traits the successful value investor needs to possess. 

Like Miyamoto Musashi in sword fencing, to succeed in value investing during a time of high uncertainty, todays value investors must excel not only at fundamental analysis. More important is cultivating broad skills and profound understanding of themselves and their counterparts.
"Small people must be completely familiar with the spirit of large people" (Musashi Miyamoto)
While financial institutions and mutual funds are big and muscular, their track record in stock market investing is by no means awesome. There are several reasons for the phenomenon that so few institutional investors can beat the market on the long- run that stand out. The most prominent are career risk and a high aversion to short-term volatility. The last phenomenon is often described as a Myopic (short-sighted) loss aversion, which also is a major contributor to the phenomenon of closet indexing.

A minority of individual investors, those with some time and the proclivity to do their own work, can do very well investing in the stock market. They just have to follow the tenet that used to work in the old days.
"(...) it is difficult for large numbers of men to change position, so their movements can easily be predicted. An individual can easily change his mind, so his movements are difficult to predict." (Musahi Miyamoto)
Find the least efficient stock market around the globe. The one that crashed over 50% and stayed at those depressed level for an extended period of time. The one where the job cull of the financial firms hit thousands of analyst. The one where the institutions are not watching anymore and have lost all their expertise.

Search for those stock markets and invest in the bargain issues and higher quality value stocks. The stocks that are given away by the ill informed and oblivious counterparts for 50 cent on the Dollar.

Just like beagles, do institutional managers tend to run in packs. They only like to invest in established markets that did not underperform for an extended period of time. And they love the securities of the front-running companies with growing earnings within those markets. They are wary of smaller companies because they cannot move in and out of them well in size.

The successful individual value investor needs to think independently and correctly. He has to use his creative imagination. He has to anticipate the not so creative institutional investors and have the guts to wager on his findings.

All the intelligent investor has to do in order to defeat the tall is to find the scent before the beagles do and bet decisively on it. Find the bargain issues. The smaller, but growing, companies in a neglected market. Hold them for an extended period of time, and finally sell them to the institutions when it gets bigger, and the pack is eager to moving in.


  1. Nice post! the bad thing is that I can only identify 1 market that meets the condition of having fallen 50% and stayed depressed right now..

  2. There might be opportunities in Mongolia, Kenya, Nigeria, but also... Portugal. PSI-20 was aiming for 8000 in 2014, since then lower and lower and lower until just recently only about 4500.

  3. you are doing a great job....retired fund manager after 30 yrs in the industry